“Just a math issue”: Anti-Corruption Efforts in Kenya take Center-Stage for Obama

File Jul 25, 11 51 17 AM

Anti-Corruption Efforts will Require some “Visible Prosecutions”

President Obama opined that it was “absolutely the right thing to do for President Kenyatta [to] emphasize” the Kenyan government’s stepped-up anti-corruption efforts.  He called public corruption potentially “the biggest impediment to Kenya growing even faster.”

“Just a math issue”

Business efforts being “constantly sapped” was a real risk to foreign direct investment, as Obama pointed out: “International businesses are concerned if the price of investing in Kenya is 5-10% going to some place that doesn’t have anything to do with the project.  It’s just a math issue.”

Acknowledging that corruption is not only an African problem (noting that even the U.S. and his hometown of Chicago had faced significant public fraud & bribery problems), the President highlighted what AAF has often stated: anti-corruption efforts imply serious cultural changes and necessary at both the top as well as the grassroots levels.  They will “require some change in habits,” and most notably “require some visible prosecutions,” according to Obama.

It is not hard to predict that President Kenyatta’s cabinet will see more shake-ups as a result of the promised stepped-up anti-corruption efforts.

The Ethics and Anti-Corruption Commission offices in Nairobi

As we noted in “Increased anti-corruption enforcement across Africa?“:

“You will read about record-breaking fines imposed; and you will hear about ever-longer jail sentences for violators.  African nations are no different in this regard than the U.S., where the DOJ has an annual tradition, almost invariably touting record-setting numbers resulting from its various enforcement divisions.  Even a quarter billion dollars of cumulative fines in South Africa are insufficient evidence of true deterrence, however — what is needed going forward is a culture of anti-corruption compliance, which goes deeper and spreads its roots more widely throughout the business & governmental community than any single record fine or jail sentence can ever accomplish,” says Andreas Stargard, an attorney with Primerio, an Africa-focused law firm and boutique business consultancy, advising on anti-corruption and competition & regulatory matters across the continent.

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Increased anti-corruption enforcement across Africa?

Chimera

Chimera or Reality — Is Africa stepping up its anti-graft game?

If one is to believe the media attention that has been bestowed upon anti-corruption enforcement by various African jurisdictions, there has been an uptick in successful anti-graft campaigns across the continent.  Or is there…?  Has Africa truly embraced the prosecution of well-to-do businessmen and government officials?  As one practitioner observes, mere penalty statistics (albeit impressive in terms of pure figures) are far from enough:

“You will read about record-breaking fines imposed; and you will hear about ever-longer jail sentences for violators.  African nations are no different in this regard than the U.S., where the DOJ has an annual tradition, almost invariably touting record-setting numbers resulting from its various enforcement divisions.  Even a quarter billion dollars of cumulative fines in South Africa are insufficient evidence of true deterrence, however — what is needed going forward is a culture of anti-corruption compliance, which goes deeper and spreads its roots more widely throughout the business & governmental community than any single record fine or jail sentence can ever accomplish,” says Andreas Stargard, an attorney with Primerio, an Africa-focused law firm and boutique business consultancy, advising on anti-corruption and competition & regulatory matters across the continent.

Over the next weeks, AAF will be investigating this “trend” of enhanced enforcement — and analyse whether it is real or only perceived.  Today, we begin with two case examples, one from the East and one from the South, both of which have recently been featured in the media with seemingly impressive news to report…

The Ethics and Anti-Corruption Commission offices in Nairobi

The Ethics and Anti-Corruption Commission offices in Nairobi

Example ‘A’: Kenya

George Wachira, a director of Petroleum Focus Consultants, writes in the Business Daily that, “over the past six months a series of events have given Kenyans some hope that this time around we may be on the right path in shaking the roots of corruption.”  He cautions, however, that the ongoing fight against corruption will yield results only “if sufficiently supported by all,” echoing Andreas Stargard’s observation of the importance of a universal “culture of compliance”:

The fight against corruption cannot survive merely on the push of top leadership. There must be in place support from effective and sustainable systems and institutions that can routinely function without prompting or interference. And recently some of these institutions have been undergoing a real-life test. … With clear and strong messages and actions from the top leadership it becomes easier to address corruption. This is an essential and critical starting point.

Second in line in the crusade against corruption is certainly the media which has been consistent in its anti-corruption messages and analysis.

The other key anti-corruption voices have included the Opposition, civil society, and a number of foreign offices with well intentioned interests in Kenya.

… I judge that the D-Day on the fight against corruption occurred when the list of shame was published with names of senior public servants suspected to have engaged in corruption. … If this process succeeds and achieves these standards, then Kenya will have moved a major step ahead in the war against corruption. If the process is derailed by whatever causes, then I am afraid we shall have lost momentum on the war on corruption. … [Another] recently launched system with similar detective capacity is the e-procurement system that can document the audit trails of all public procurement.

It is evident from recent events that Kenya can and should keep on the path towards a country with reduced corruption. We need to appreciate the efforts of all the players in this anti-corruption crusade.

As a general matter, AAF concurs with Mr. Wachira’s comments and the tenor of this article: it takes  more than just one element to create an effective anti-corruption system that both prevents as well as detects and punishes violations swiftly.

As he points out, this system may well start “from the top,” as is the case with the Kenyan presidents recent pronouncements on his unwillingness to tolerate corrupt government dealings.  The question is, however, what happens if society cannot rely on its top officials to provide such guidance, nor rely on even lip-service paid to the anti-graft movement.  An example is South Africa, our next case study, where the recent worldwide FIFA corruption scandal resonated with particular momentum, given the country’s past hosting of the FIFA soccer World Cup.  As several news outlets have reported, the South African government (at its highest levels, including the Ministry of Sports and Recreation), has tried to keep details of the FIFA bribery allegations from the country’s public, specifically by instructing ex-Cup local organising committee (LOC) members not to give interviews and to hand over any evidence to the Ministry only.  Other corporate fraud scandals (ex.: Nedbank) continue to embroil the country, whose economy (and currency) appear on a perpetually and dangerously downward-sloping curve.

Example ‘B’: South Africa

In our FIFA article, we pointed out with significant concern that “the South African Government’s, particularly under the auspices of President Zuma, dismantling of key enforcement agencies, especially the National Prosecution Services … has effectively prevented proactive enforcement of corrupt activities.”

Nonetheless, in the South African daily Times, Babalo Ndenze recently summarised the “most successful year yet” for the country’s Asset Forfeiture Unit — some of the few corruption-busters that have remained intact since a sweeping and politically-driven “overhaul” of the anti-graft investigative units in Africa’s southernmost Republic has caused the effective number, quality and fervour of public fraud prosecutors to dwindle to dangerous lows.  As we observed in a prior article on the perception of corruption in the country causing less foreign direct investment, “a new report released by the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School, concludes that corruption remains one of the major obstacles to Africa’s economic rise: among the Southern African Development Community (SADC), South Africa suffers particularly from the perception of a high prevalence of bribery and corruption in the granting of South African government contracts and procurement tenders …”

Nonetheless, the Times chimes in with healthy enforcement statistics, and we will conclude today’s instalment with a recitation of those numbers:

The crime-fighting unit recover R2.8-billion [that’s almost $250 million] during the 2014-2015 financial year. Its biggest haul involved freezing contracts worth R1.8-billion issued by the Gauteng health department.

The unit also froze orders worth R4.2-million against a company that was awarded a tender to transport mourners to Nelson Mandela commemoration events in the Eastern Cape. The tender process was rigged.

A number of Buffalo City Municipality officials, including former mayor Zukiswa Ncitha, were implicated in the case.

The unit also recovered a farm worth R1.5-million in the Free State that had been illicitly obtained by an SA Police Service detective.

The unit froze and recovered R59-million in various bank accounts of people who defrauded the Social Housing Regulatory Authority in East London . The unit also recovered some of the authority’s R4.8-million that had disappeared for “personal purposes”.

It was assisted by the National Treasury to recover more thanR61-million that was swindled from the authority’s coffers.

A list of the unit’s major recoveries appears in the National Prosecuting Authority’s latest annual report, which has been tabled in parliament.

According to legislation, the seized money goes into the central revenue fund.

“The unit achieved its best-ever performance, obtaining freezing orders to the value of R2.8-billion, significantly exceeding the annual target of R755-million by 265% and last year’s performance by 293%,” the report read.

The unit’s head, Willie Hofmeyr, said this success can be attributed to working closely with other crime-fighting institutions such as the Hawks, the police and the Special Investigating Unit.

“We’ve had a few good years in the past but this was probably our best,” he said.

“It’s true that working together has made a difference

“Tender-preneurs” holding back tech investment in Africa

Will technological tender process end the reign of “tender-preneurs”?

Biztech Africa‘s Tom Jackson reports from Connected East Africa conference in Diani, Kenya, that former Kenyan permanent ministry secretary Dr Bitange Ndemo has given a speech on how corruption is holding back technological investment in the country.

Image: By BiztechAfrica

The paper reports that development as a tech hub in East Africa is “being held back by corruption and “tender-preneurs” who take advantage of lax procurement regulation.”

The speaker was in the ministry until 2013 and has since returned to the University of Nairobi.  Referring to new government initiatives to digitise the procurement process (in order to prevent and/or limit corrupt tenders), he said that “I hope, and I pray, that this anti-corruption process at the moment reveals the true ‘tender-preneurs’.”

“Because the problem is in the procurement law and the PPP law. We have super wheeler dealers behind and then you are the one that gets in trouble. But if they were to decide to work for the people then Kenya would be developed in one year. Because they can execute.”

Halliburton to Goodyear: FCPA risks and due diligence in foreign acquisitions

Averting their eyes from Africa: Goodyear’s $16m Kenya/Angola settlement highlights risk of insufficient due diligence

Andreas Stargard.

“Foreign acquirers must understand and — likely — challenge the status quo of their new African subsidiaries”

When acquiring an African company, nothing is “business as usual.”  Neither pre- nor post-acquisition can foreign parent corporations simply avert their eyes and let their newly acquired business units be run as before.  The status quo must be understood and – likely – challenged.

Case in point: Goodyear’s Africa troubles (plural, because they originate in both Kenya and Angola).

In its February 24, 2015 news release, the Securities and Exchange Commission (SEC) announced Goodyear’s disgorgement of over $14 million in profits, plus over $2 million in prejudgment interest, as well as reporting, remediation and compliance obligations for a period of 3 years: “Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books,” said Scott W. Friestad, Associate Director of the SEC’s Enforcement Division.”

The release details the following alleged violations of the two African subsidiaries, acquired by the Ohio-based Goodyear Tire Company incrementally between 2002 (minority shareholding) and 2006 (when it became a majority owner):

[The Kenyan subsidiary] bribed employees of the Kenya Ports Authority, Armed Forces Canteen Organization, Nzoia Sugar Company, Kenyan Air Force, Ministry of Roads, Ministry of State for Defense, East African Portland Cement Co., and Telkom Kenya Ltd.

Goodyear’s subsidiary in Angola bribed employees of the Catoca Diamond Mine, which is owned by a consortium of mining interests including Angola’s national mining company Endiama E.P. and Russian mining company ALROSA.  Others bribed in Angola worked at UNICARGAS, Engevia Construction and Public Works, Electric Company of Luanda, National Service of Alfadega, and Sonangol.

In the accompanying Order, the SEC alleges that:

1. … From 2007 through 2011, Goodyear subsidiaries in Kenya (Treadsetters Tyres Ltd., or “Treadsetters”) and Angola (Trentyre Angola Lda., or “Trentyre”) routinely paid bribes to employees of government-owned entities and private companies to obtain tire sales. These same subsidiaries also paid bribes to police, tax, and other local authorities. In all, between 2007 and 2011, Goodyear subsidiaries in Kenya and Angola made over $3.2 million in illicit payments.

2. All of these bribery payments were falsely recorded as legitimate business expenses in the books and records of these subsidiaries which were consolidated into Goodyear’s books and records. Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries in sub-Saharan Africa.

Failing to conduct proper due diligence on an African target company is risky at best.  Leaving its day-to-day operations thereafter unchecked and unaltered, however, is the downright equivalent of requesting a cease & desist order (or worse yet, a judgment) from an American or European enforcement agency or court.  As the SEC noted, “the day-to-day operations of Treadsetters continued to be run by Treadsetters’ founders and the local general manager.” (Id. at para. 7).  Goodyear notably “failed to implement adequate FCPA compliance training and controls after the acquisition.”

Luckily for Goodyear (which has since then shed its Kenyan business and is in the process of selling its Angolan interests), the Department of Justice decided not to pursue parallel criminal charges for the same conduct, and so the SEC went ahead solo, culminating in the Order quoted above.

Would Goodyear have benefited from Halliburton?

Generally speaking, a buyer acquires the target’s liabilities — neither the FCPA nor the antitrust laws provide a unique exception to this rule.  A quick look at General Electric’s experience (GE agreed to pay $23.4 million to settle the SEC’s charges, including against two subsidiaries for which GE assumed liability upon acquiring) and eLandia ($2 million payment for its subsidiary Latin Node’s bribery scheme pre-acquisition) amply prove the point.

That said, under certain circumstances where proper and fulsome due diligence is “severely compromised,” a future corporate parent may insulate itself from FCPA liability: flash-back to June of 2008, when the Department of Justice issued valuable FCPA guidance in the form of its Halliburton “opinion procedure release”: In it, the DOJ discussed how it would treat the liability of an acquiring company whose pre-closing investigative ability to conduct full-scale due diligence is, by (foreign) statute or other circumstance, insufficient to guarantee discovery of any existant FCPA liabilities of the acquisition target.  In particular, the DOJ said:

[A]n acquiring company may be held liable as a matter of law for any unlawful payments made by an acquired company or its personnel after the date of acquisition. … Under the
circumstances […] there is insufficient time and inadequate access to complete
appropriate pre-acquisition FCPA due diligence and remediation. As represented by Halliburton, under the application of the U.K. Takeover Code, it has no legal ability to require a specified level of due diligence or to insist upon remedial measures until after the acquisition is completed. As a result, Halliburton’s ability to take action to prevent unlawful payments by Target or its personnel during the period immediately after the closing has been severely compromised. Assuming that Halliburton, in the judgment of the Department, satisfactorily implements the post-closing plan and remediation detailed above, and assuming that no Halliburton employee or agent knowingly plays a role in approving or making any improper payment by Target, the Department does not presently intend to take any enforcement action against Halliburton for any postacquisition violations of the antibribery provisions of the FCPA committed by Target during the 180-day period after closing provided that Halliburton: (a) discloses suchconduct to the Department within 180 days of closing; (b) stops and remediates such conduct within 180 days of closing, or, if the alleged conduct, in the judgment of the Department, cannot be fully investigated within the 180-day period, stops and remediates such conduct as soon as it can reasonably be stopped; and (c) completes its due diligenceand remediation, including completing its investigation of any issues that are identifiedwithin the 180-day period, by no later than one year from the date of closing.

Setting aside the difference in enforcement agencies (SEC in Goodyear vs. DOJ in Halliburton), had Goodyear made an effort similar to that of Halliburton (which, of course, is no stranger to significant FCPA enforcement actions itself (see also here and here on the Bonny Island debacle), despite having sought and obtained this favorable opinion back in 2008), it would have stood to benefit from similar lenience — but only insofar as it concerned initial determination, through due diligence (ideally pre-acquisition, but potentially still within a 180-day window), whether or not its African acquisition posed a corruption risk back in the U.S.

In light of the ongoing nature of the FCPA-violative conduct post-acquisition, however, there appears to be little effort made on behalf of the parent entity to uncover (or, for that matter, halt) the offending actions in Goodyear.  In this regard, notably excluded from the DOJ’s relatively lenient position is, of course, similarly ongoing conduct.  The Department expressly reserves the right to enforce:

(a) any FCPA violations committed by Target during the 180-day period that are not disclosed to the Department during this same time period; (b) any FCPA violations committed by Target at any time where any Halliburton employee or agent knowingly participates in the unlawful conduct; and (c) any issues identified within the 180-day period which are not investigated to conclusion within one year of closing. In no event does this Opinion Release provide any protection for any conduct which occurs after the 180-day period.

Perceived Corruption Hampers Asian Investment in Kenya

 

Chinese Investors See East African Corruption As Hurdle to further Investments

Welcome to 2015, AAF readers.  Our editors and staff are looking forward to a great New Year of providing you with news and insights into anti-corruption and fraud-prevention on the African continent.

Our first story of the year hails from East Africa, when CNBCafrica‘s Elayne Wangalwa reports on the dampening effect of Asian investment into the Kenyan economy due to the high degree of perceived corruption in the state.

In her article, Wangalwa writes that the primary alleged culprits are the Nairobi City Council and the Kenya Revenue Authority.  These figures are based on statistics resulting from a Business Perceptions Index (BPI) survey requested by the Sino-Africa Centre of Excellence Foundation.  The study surveyed approximately 400 Chinese state and privately-owned firms active in East Africa (75 in Kenya).

Interestingly, the foreign investors were partially at fault when the bribery-allegation triggers occurred: “Most of [the Asian companies] were asked for bribery when the officials found misconduct in their business practices, like the absence of some business certificate display,” according to the survey, resulting in the BPI suggestion that “Chinese companies learn more about Kenyan laws and regulations.”

According to CNBCafrica, the Chinese presence has been augmented significantly since the last visit of Chinese Premier Li Keqiang to the country in 2014, with the number of Chinese expatriates in Kenya more than doubling.

FCPA investigation hits FedEx in Kenya

 

Kenya and FedEx: Possible breach of FCPA anti-bribery provision

According to Wall Street Journal and Law360 reports, two powerhouses (one country, one company) are involved in a recent self-reported FCPA violation: FedEx Corporation has reported possible infractions of the foreign anti-bribery law in Kenya to the United States Department of Justice.

According to the articles, “FedEx says it told the authorities at the DOJ and the SEC that it had received an email in December outlining allegations of potential bribery in the Republic of Kenya and possible violations of the FCPA. The shipping giant has been investigating the matter since 2013 but has been unable to substantiate the reported claims, the company said.”

“FedEx informed the DOJ and SEC of these allegations shortly after their receipt and have been engaged in a cooperative dialogue with both agencies since that time,” a FedEx spokesperson told Law360 late Tuesday night. “To date, FedEx has not found anything to substantiate the allegations, but the investigation is ongoing.”

The company was allegedly tipped off anonymously late last year, involving claims made in an e-mail (which the sender also threatened to send to the DOJ and Securities and Exchange Commission) that its on-the-ground agent, Pan Africa Express, was implicated in bribing Kenyan government officials in return for favorable conduct, such as “customs officials to clear shipments without inspection, as well as to government vehicle inspectors and others, the person alleged,” according to the WSJ article.

Survey shows perception gap and increased corruption

Survey shows that perception of corruption & bribery on the rise

As also reported by BDLive’s Evan Pickworth, a recent Ernst & Young survey shows that the perception of widespread bribery and corruption by South African executives has increased climbed by 16% to an overall 78% response.

The article mentions the “high-profile regulatory enforcement [that] has been taking place since the 2009 crisis highlighted gaping holes in the system, but most of this action has centred on banks and insurers. The challenge remains closing loopholes across all business sectors before they lead to another crisis.”

The EY survey – entitled “Navigating today’s complex business risks Europe, Middle East, India and Africa Fraud Survey 2013” – placed South Africa third on the overall perceptions of bribery and corruption, behind Nigeria (88%) and Kenya (87%) and just before Greece at 72%. Namibia closed the top five with a reading of 72%.

While approximately 7% of global executives were reported to have been asked to pay bribes, the South African figure is 43% higher, at 10%.

The report also shows a “perception gap” of dramatic proportions in Kenya, where 94% of respondents said they feel that corrupt practices are commonplace in their country, yet only 26% perceived it was common to use bribes to win contracts in their particular industry sector.

Finally, there is the question of discriminatory application of anti-bribery laws: 3 African nations made the top-10 list in this category, including South Africa (29% agreed that their authorities regulated foreign companies more heavily than local businesses), Nigeria (26%) and the 4th-ranked overall, Kenya (36%).